Online Investing – The Truth about Fear and Panic Thoughts

January 20, 2010

Fear is a very clear, raw emotion. It is not something we can lie to ourselves about and pretend we don’t feel. When watching a stock plummet, or the bottom of the market falling out, we know very directly how strong fear may be. And, of course, our fear may be compounded by the fear of others, which is what creates mass panic reactions that jolt the market.

Even relatively more hardened professional institutional traders are not immune to frenzied buying and panic selling reactions. But they have usually learned how to cope with them better than individual investors. They are less likely to become frozen with fear and more likely to jump into action as a way of coping with both fear and the greed that mounts during a frothy market. They thrive on the action.

One of the reasons fear is so clear is that we experience physical symptoms that we have learned to identify and label as “fear.” These include: accelerated heartbeat, increase in blood pressure, perspiration, shakiness, stomach pains (knot), muscle tightness, headache, numbness of the extremities, ringing in the ears, blurred vision, and dryness of the mouth.

Along with these physical symptoms, we also may experience either nervousness and physical agitation or a sense of being frozen in our tracks, where we can’t move. I have seen traders at a day trading firm stare at their monitors with their eyes bugging out and mouths hanging open, unable to move, as they watched their stocks plummet.

Because some day traders are commonly buying in 1000-share lots, each fractional move is significant. To be unable to move quickly enough to get out in a rapid slide can be very costly. They simply do not have the luxury of becoming frozen with fear, even for a minute. Of course, if you’re not trading for “teenies” (1/16 of a point), you need not worry so much about immediate fear reactions.

Fear thoughts tend to increase physical symptoms and symptoms tend to increase further negative thinking. Any attempt at clear thinking gets smothered by our emotional reaction.

Our experience of time changes during panic. Time seems to speed up. There is no future¡ªonly the urgency of the moment. Each minute rushing into the next stands for further loss. The future spells utter doom; we try to prevent it.

When we feel strong fear and panic, we are psychologically trying to stop the future from occurring. When we feel mild anxiety, we are trying to delay it. Read those two lines again and think about them.

Negativity and fear are often characterized by all-or-nothing thinking. We only think of the extremes of what may occur, nothing in between. This is also called “catastrophic” thinking. All we can see is the very worst possible outcome, and our fear is reinforced by focusing on this worst-case scenario.

Examples of Catastrophic Thinking

All kinds of negative thoughts about the present and the future take over:

– “I’m going to lose all of my profit!”
– “I’m going to lose a big chunk of my investment capital.”
– “Months (minutes, weeks, or years) of steady gains are now going down the drain.”
– “This will only accelerate¡ªI need to get out now!”
– “My vacation (new car, house deposit, new computer, big screen TV, etc.) money is evaporating. I can’t sit here and watch this!”
– “My hard-earned retirement funds are losing value big time. I’ll end up unable to retire when I had planned. We’ll be poor and have to live in a trailer park in the Ozarks.”
– “My kids’ college funds won’t have enough when they need it. They’ll be forced to go to some terrible junior college.”